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FORM 10-Q

U.S. Securities and Exchange Commission

Washington, D.C. 20549

(Mark One)

For Quarterly Period ended March 31, 2003

For the transition period from                          to                         

Commission File Number: 0-25960

THE BANK OF KENTUCKY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

111 Lookout Farm Drive, Crestview Hills, Kentucky 41017

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number: (859) 371-2340

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 22, 2003 the latest practicable date, 5,961,849 shares of the Registrant’s Common Stock, no par value, were issued and outstanding.

The Bank of Kentucky Financial Corporation

INDEX

THE BANK OF KENTUCKY FINANCIAL CORPORATION

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

See accompanying notes

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

(Dollars in thousands, except per share data)

(unaudited)

See accompanying notes

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Dollars in thousands)

(unaudited)

See accompanying notes

THE BANK OF KENTUCKY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

See accompanying notes

THE BANK OF KENTUCKY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002

Note 1—Basis of Presentation:

The consolidated financial statements include the accounts of The Bank of Kentucky Financial Corporation (BKFC or the company) and its wholly owned subsidiary, The Bank of Kentucky (the Bank). All significant intercompany accounts and transactions have been eliminated.

Note 2—General:

These financial statements were prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all of the disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Except for required accounting changes, these financial statements have been prepared on a basis consistent with the annual financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position at the end of and for the periods presented.

Note 3—Earnings per Share:

Earnings per share are computed based upon the weighted average number of shares outstanding during the respective three month periods. Diluted earnings per share are computed assuming that average stock options outstanding are exercised and the proceeds, including the relevant tax benefit, are used entirely to reacquire shares at the average price for the period. The following table presents the number of shares used to compute basic and diluted earnings per share for the indicated periods:

Note 4—Stock Compensation:

Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, as of March 31.

Item 2. Management’s Discussion and Analysis of Financial Condition and the Results of Operations

This Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements cover, among other things, anticipated future revenue and expenses and the future prospects of either The Bank of Kentucky Financial Corporation (BKFC or the company) or The Bank of Kentucky (the Bank) or both. Forward-looking statements involve inherent risks and uncertainties, and important factors could cause actual results to differ materially from those anticipated, including the following, in addition to those contained in BKFC’s reports on file with the Commission: (i) general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for credit losses, or a reduced demand for credit or fee-based products and services; (ii) changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; (iii) the conditions of the securities markets could change, adversely affecting revenues from capital markets businesses, the value or credit quality of the Company’s assets, or the availability and terms of funding necessary to meet the Company’s liquidity needs; (iv) changes in the extensive laws, regulations and policies governing financial services companies could alter BKFC’s and the Bank’s business environment or affect operations; (v) the potential need to adapt to industry changes in information technology systems, on which the Bank is highly dependent, could present operational issues or require significant capital spending; (vi) competitive pressures could intensify and affect the Bank’s profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments or bank regulatory reform; and (vii) acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated, or may result in unforeseen integration difficulties. Forward-looking statements speak only as of the date they are made, and BFKC undertakes no obligation to update them in light of new information or future events

FINANCIAL CONDITION

Total assets at March 31, 2003 were $778,126,000 compared to $779,080,000 at December 31, 2002, a decrease of $954,000 (.12%). Deposits increased $2,650,000 (.40%) to $669,996,000 at March 31, 2003 compared to $667,346,000 at December 31, 2002 while Notes payable decreased $5,068,000 (12%) to $37,531,000 at March 31,2003 from $42,599,000 December 31, 2002. Loans outstanding decreased $2,448,000 (.40%) from $606,815,000 at December 31, 2002 to $604,367,000 at March 31, 2003. The balance sheet was relatively static for the quarter as new loan production was offset with payoffs and paydowns and the deposits base was stable. One area that increased was Available-for-sale securities, which increased $22,690,000 (52%) from $43,770,000 at December 31, 2002 to $66,460,000 at March 31, 2003 and was partially offset with a decrease in Fed Funds sold of $15,265,000 (73%) from $20,968,000 at December 31, 2002 to $5,703,000 at March 31, 2003. The Available-for-sale change was the result of an increase in Money Market Mutual funds of $25,063,000 (251%) from $10,000,000 at December 31, 2002 to $35,063,000 at March 31, 2003.

RESULTS OF OPERATIONS

GENERAL

Net income increased $222,000 (11%) in the first quarter of 2003 to $2,226,000 ($.37 per share), compared to $2,004,000 ($.34 per share) for the same period in 2002. The first quarter of 2003 was the first full quarter after the purchase of certain assets and the assumption of certain liabilities of the Peoples Bank of Northern Kentucky (PBNK) and the largest percentage increase in revenue was seen in non-interest income which was up $859,000 or 82% to $1,910,000 in 2003 compared to $1,051,000 for the same period of 2002.

NET INTEREST INCOME

Net interest income for the first quarter of 2003 increased to $6,539,000, an increase of $1,348,000 (26%) compared to $5,191,000 for the same period in 2002. A large increase in the net interest income was the result of the growth in earning assets and interest bearing liabilities associated with both the PBNK transaction and the growth experienced in 2002, and was offset with a drop in the net interest margin to 3.78% in the first quarter of 2003 from 4.48% for the same period in 2002. The decline in the net interest margin was the result of the historically low current interest rate environment and the balance sheet changes associated with the PBNK transaction. The net effect of the balance sheet changes was an increase in liquidity that led to a higher percentage of short-term investments to earning assets compared to a year ago, and a higher level of non-earning assets in the form of fixed assets and goodwill.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $150,000 for the three months ending March 31, 2003, an decrease of $22,000 compared to the $172,000 provision recorded during the same period in 2002. During the three-month period of 2003, total loans decreased by $2,448,000, from $606,815,000 at December 31, 2002 to $604,367,000 at March 31, 2003, and non-performing loans declined slightly, to $4,024,000 or .67% of total loans outstanding at March 31, 2003, compared to $4,173,000 at December 31, 2002. Net charge-offs, year to date 2003 were $112,000 or .07% on an annualized bases to average loans, similar to the $48,000 and .05% respectively recorded in 2002. The decreases in non-performing loans and total loans outstanding accompanied with the stable charge-off levels led to the decline in the provision from 2002. Management continues to monitor the loan portfolio closely and believes the allowance, at 1.07% of loans at March 31, 2003 compared to 1.06% of loans at December 31, 2002, is sufficient to absorb probable incurred losses in the loan portfolio.

NON-INTEREST INCOME

Total non-interest income increased $859,000 (82%) during the first quarter of 2003 from $1,051,000 in 2002 to $1,910,000 in 2003. The 2003 figures reflect the effects of the PBNK transaction, which added eight banking offices, sixty-two employees, $140 million in loans and $162 million in deposits. The largest increase in non-interest income was in gains on the sale of mortgage loans, which increased $460,000 in the first quarter of 2003 to $631,000 from $171,000 for the same period last year. The increase was due to strong refinancing activity as a result of the current low interest rate environment. The Bank originates fixed rate first mortgage loans and sells them, service released, into the secondary market. During the first quarter of 2003, 545 loans with a principal balance of $80 million were sold compared to 152 loans with a principal balance of $15 million during the same period in 2002. Loans held for sale at March 31, 2003 decreased to $6,244,000 from $10,799,000 at December 31, 2002. These loans have been approved by the secondary market buyer and closed by the Bank. The Bank is awaiting settlement but is not exposed to significant interest rate or pricing risk during the period between closing the loan and settlement. Service charges and fees on deposit accounts increased by $245,000 (44%) from $551,000 in the first quarter of 2002 to $796,000 for the same period in 2003, reflecting the significant increase in volume associated with the added deposits. The Bank had no gains or losses from the sale of investment securities in 2003 versus a realized gain of $26,000 on the sale of $2,000,000 in available for sale securities in 2002.

NON-INTEREST EXPENSE

Non-interest expense increased to $4,937,000 in the first quarter of 2003 from $3,099,000 in 2002, an increase of $1,838,000 (59%). The 2003 figures reflect the effects of the PBNK transaction, which added eight banking offices, sixty-two employees, $140 million in loans and $162 million in deposits. The added staff was the largest added expense and drove the salaries and benefits increase of $764,000 (51%) in the first quarter of 2003 to $2,264,000 compared to $1,500,000 for the same period in 2002. Occupancy and equipment expense increased $401,000 (81%) from $493,000 in the first quarter of 2002 to $894,000 in 2003 as a result of the added banking offices, and high amount of snow removal expense in 2003. Non-interest expense includes $161,000 in the amortization of intangible assets associated with the PBNK transaction in 2003 versus $0 in 2002.

INCOME TAX EXPENSE

Income tax expense increased due to higher income before taxes and a higher effective tax rate of 33.79% compared to 32.55% for the same period last year. The higher effective tax rate was due to a higher tax bracket associated with higher earnings.

LIQUIDITY AND CAPITAL RESOURCES

The Bank achieves liquidity by maintaining an appropriate balance between its sources and uses of funds to assure that sufficient funds are available to meet loan demands and deposit fluctuations. The Bank has the ability to draw funds from the Federal Home Loan Bank and two of its correspondent banks to meet liquidity demands. Management is satisfied that the Company’s liquidity is sufficient at March 31, 2003.

The company’s total shareholders’ equity increased $1,701,000, from $58,423,000 at December 31, 2002 to $60,124,000 at March 31, 2003. In the first quarter of 2003 the Company paid a cash dividend of $.08 per share totaling $477,000.

On March 16, 2001 the Company’s Board of Directors approved the repurchase and retirement of up to 2% of the outstanding common shares of the Company in the over-the-counter market. All shares were repurchased according to the agreement by the end of the third quarter of 2001. On October 8, 2001 the Company’s Board of Directors approved the repurchase and retirement of 100,000 common shares of the Company in the over-the-counter market. As of the date of this report, 96,630 of the 100,000 shares authorized for repurchase had been repurchased. Any repurchases are funded, as needed, by dividends from the Bank.

For purposes of determining a bank’s deposit insurance assessment, the FDIC has issued regulations that define a “well capitalized” bank as one with a leverage ratio of 5% or more and a total risk-based ratio of 10% or more. At March 31, 2003, the Bank’s leverage and total risk-based ratios were 8.47% and 10.69% respectively, which exceed the well-capitalized thresholds.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There has been no material change in market risk since the Company’s annual report on Form 10-K for the year ending December 31, 2002.

Item 4. Controls and Procedures.

Disclosure controls and procedures are BKFC’s controls and other procedures that are designed to ensure that information required to be disclosed by BKFC in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision, and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this annual report, and, based upon this evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are adequate to ensure that information requiring disclosure is communicated to management in a timely manner and reported within the timeframe specified by the SEC’s rules and forms.

There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of our most recent evaluation.

The Bank of Kentucky Financial Corporation

PART II

ITEM 1. Legal Proceedings

From time to time, BKFC and the Bank are involved in litigation incidental to the conduct of the its business, but neither BKFC nor the Bank is presently involved in any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse affect on BKFC.

ITEM 2. Changes in Securities and Use of Proceeds

Not applicable

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Submission of Matters to a Vote of Security Holders

Not applicable

ITEM 5. Other Information

None

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibits

(b) Reports of Form 8-K.

BKFC filed an amended current report on Form 8-K on February 7, 2003, disclosing under Item 7, financial statements and pro forma information regarding the acquisition of certain assets and assumption of certain liabilities of Peoples Bank of Northern Kentucky, Inc., a Kentucky state bank.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q

I, Robert W. Zapp, certify that:

/s/    Robert W. Zapp

Robert W. Zapp

President and Chief Executive Officer

Date: May 14, 2003

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q

I, Robert D. Fulkerson, certify that:

/s/    Robert D. Fulkerson

Robert D. Fulkerson

Treasurer and Assistant Secretary

(Chief Financial Officer)

Date: May 14, 2002